Posted
by
CmdrTaco
on Wednesday January 07, 2009 @12:20PM
from the i'm-sure-they-won't-filter-anything-either dept.

itif writes "This report takes a look at how many jobs you get if you invest $10 billion each in three different IT infrastructure projects — broadband, health IT and the smart grid. It argues that if you are going to be spending billions on a stimulus package, investing in 'digital infrastructure' creates more jobs than physical infrastructure (e.g. roads and bridges) in the short-term, and you get a whole host of other benefits in the long-term."

But the future spending would have the "multiplier" as well. They cancel each other out. Read Hazlitt's "Economics in One Lesson" for more info (there is a free version online but I don't have the link handy ATM).

Who tagged it brokenwindowfallacy? It's no broken window fallacy. In the broken fallacy nothing is gained from breaking the window and replacing it. Here we invest into an infrastructure, to end up with something better you can make better business with. It's called an investment.

Every penny spent on a "stimulus" must be taken from taxpayers, either directly or indirectly, either now or in the future, and that penny will NOT be spent creating jobs elsewhere. At best, you are taking away future jobs to support current ones, or, to state exactly the same thing in different terms, you are borrowing from the future to support unsustainable lifestyles now . . . which is exactly what got us into this mess to begin with.

Not exactly. Borrowing for the wrong reasons is what got us into this mess. Borrowing for the right reasons (increase future earning potential) can more than offset the debt, leaving you with an income large enough to both pay back what you owe and have more to live on than you ever would have without that initial debt. It happens all the time at an individual and corporate level, this is just expanding it to the entire country. The key is having the discipline to pay back the debt once the increased earnings are realized, which so far very few incarnations of government have had the discipline to do.

But even saved money gets spent by those that borrowed it from savers.

It might. It might not. It particularly might not when, as is the case right now, deflation occurs, as $1 tomorrow becomes worth more than $1 today, so it makes perfect sense from the perspective of each individual spender to hold cash and defer spending, since cash then has a positive real rate of return.

There is very little money sitting idle.

Not only does hoarding result in money sitting idle, right now there is money outright being destroyed as banks just don't extend credit at all (at least, not in the quantities they have until recently), while they continue to accept deposits and payments on existing debt. Its not like the actual money supply is some fixed number based on the number of pieces of paper currency printed and in circulation; most money exists entirely as notations of account, and while reserve limits and similar regulations limit the amount of some forms of money that can be created, there is nothing that keeps the money supply constant.

All the government is doing here is diverting saved money that would be spent by borrowers in other parts of the economy and redirecting it to government projects.

Even if this was true (which it is not, even if you refer to the world economy when you say "the economy"), that could still create jobs in as not all spending is equally effective at job creation. This is especially the case if you talk about creating jobs in the US economy, since the economy from which the US government takes money to spend when it borrows money is not exclusively the US economy.

It doesn't create jobs. It reallocates jobs.

No, it reallocates money. Whether or not it creates more jobs than would otherwise be the case depends on how efficient the use it puts money to is at creating jobs as compared to the uses to which the money would otherwise have been put. This is also true (and even more relevant) if you add "in the US" after each instance of "jobs" in the previous sentence.

While it is possible to approach investing in the same way that one approaches gambling the idea that Investing == Gambling is one of the most persistent and damaging ideas to enjoy wide currency among the non-investor classes of society. The definitions taken from the following article [investorguide.com] are instructive:

Investing is any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): sufficient research has been conducted; the odds are favorable; the behavior is risk-averse; a systematic approach is being taken; emotions such as greed and fear play no role; the activity is ongoing and done as part of a long-term plan; the activity is not motivated solely by entertainment or compulsion; ownership of something tangible is involved; a net positive economic effect results.

Gambling is any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): little or no research has been conducted; the odds are unfavorable; the behavior is risk-seeking; an unsystematic approach is being taken; emotions such as greed and fear play a role; the activity is a discrete event or series of discrete events not done as part of a long-term plan; the activity is significantly motivated by entertainment or compulsion; ownership of something tangible is not involved; no net economic effect results.

The M1 multiplier (that has fallen below zero) is the ratio of the M1 meaure of money supply to the Adjusted Monetary Base measure. . It is fair to say it is something of a measure of the utility of policies that seek to stimulate the economy by increasing M1 (though even there it is limited, since even the Adjusted Monetary Base measure is just a different measure of money supply, not a measure of economic activity); it has little to do with either the velocity of money (the source of the "multiplier effect" being discussed in this thread, which is not the same thing as the "M1 multiplier" you point to; the "multiplier effect" relates to how often a particular dollar in the money supply is spent, not the ratio between two different measures of the money supply) or the ability of the government to stimulate by borrowing dollars from domestic and foreign holders of dollars and spending it in particular, focussed areas (since such policy does not rely on manipulate M1.)

The author of that piece attempts to confuse the issue by posting a different graph that shows a falling trend in how effective stimulative government deficit spending has been on average recently, and attempting to suggest, without any real reason, that the two graphs are directly related and indeed that the M1 multiplier graph says that the trend shown in the other graph is actually worse than it appears. This is not rational. The second graph does show a long-term problem, and particularly does show why, once this recession ends, the US government must, in the subsequent expansion, begin to pay down the debt or at least stop expanding the debt faster than the GDP during expansions, because if we keep deficit spending through expansions so that the debt:GDP ratio keeps going up, we'll soon reach the point where we can't use deficit spending to stimulate the economy when it is in recession. But, contrary to Denninger's alarmism, the M1 multiplier going below 1 doesn't indicate that the trend in debt utility shown in the second graph is worse than that graph actually shows. They are completely different issues.

The bit you're missing is the point of spending $x. Investment is different to simply buying something. You invest to increase your stock of productive assets. For example, borrowing to build a rail line that enables people to move goods more cheaply may result in increased economy activity, more business are profitable now than they were before the rail line. The tax take goes up, I easily pay off the $x over time, even though I pay an interest premium on it.

The problem really is borrowing to pay for a non-productive asset. Something that doesn't add to your, or societies, capability to make more "stuff" (which could be services too). This is why household debt is such a problem, it will have to be paid from future production, but the nature of what people spent the debt on (that awesome plasma say) does nothing to help them or society pay that debt.

Just once, I've love to hear a die-hard libertarian explain how privatized roads would work. Just once.

They work quite well and in France of all places (hardly a Libertarian paradise). There are 1,00,960 km of roads in France and unlike many other countries, most of them are toll and operated by private companies such as Société des Autoroutes de Paris Normandie (SAPN). Now, before you respond, "Well, nobody drives in France" it is important to realize that France is among the most car dependent countries in Europe with 937 billion vehicle kilometers travelled in 2005 (85% by car). Despite this extensive private road network the public transport in France, as in many other developed EU states, is excellent (particularly by American standards) with high speed rail service, trams, and light railways providing extensive connections.

Now obviously it is not practical to privatize every last minor road and many forms of public transportation, street cars and buses for example, share the same local road networks as private vehicles. However, the example in France demonstrates that a quality network of highways and even regional roads can be maintained quite well by private enterprise. Indeed, that is more equitable. Why should people who never use the Highways pay for them? If they only take the bus and use trains or airplanes for longer trips then why should they pay for highways with their taxes?

The problem comes when people on both sides try to paint the issue of public vs private roads as an all or nothing proposition without acknowledging that a balance of the two is really what yields the best results.

The problems we are having are in general a result of deregulation. For example conflicts of interest between the buy side and the sell side of a brokerage. Or conflicts of interest between the investment banking arm of a bank and the traditional arm. Or conflicts of interest between stockholders and bondholders, or executives and boards of directors.

That is precisely the kinds of problems that government "getting in the way" is good at fixing.

A company must turn a profit to succeed. A government just needs to accomplish a decent rate of return on their investment for the entire aggregated economy it governs. If Blah Corp takes on the risk of creating a new design it fails if Goo Corp copies it and gets to market first. If the U.S. government takes on the "risk" of, say, putting in more internet capacity, the "downside" is limited to overestimating demand. That's what everybody was saying Korea did in the nineties. Now that those fat pipes have helped Korea become a powerhouse in a dozen fields, nobody is saying that anymore.The only real risk that government faces is if the level of corruption is so vast that nothing gets built. This is a real risk, as anybody who has watched the fiasco of the "digitizing" of the patent system call tell you about. But it is addressable and is a risk for corporations, too.Look at what happened to the OLPC project. Their own devices have been meh at best. But it's pretty damn obvious that they inspired the netbook market, which has been a vast win for everybody, including their intended recipients. No OLPC, no Intel Classmate, no EEE PC, and so forth. And, from the looks of it, we'll be seeing the Pixel Qi tech coming out in another year or two, which will be yet another vast win for their intended result. Have they "turned a profit"? No. Have they achieved an excellent return on investment? Hell fucking yes.In short, most of what makes a project "risky" to a profit-making entity is a null-value statement in a case like this.